Suppliers seek timeout on metal tariffs

Companies need time to develop more affordable domestic sources of metal

Asking Trump administration for grace period from the 25 percent tariffs

Alex Kraus/Bloomberg

Inside a steel plant as the Trump administration announces new tariffs.

WASHINGTON — Unable to win many exemptions from the Trump administration's tariffs on imported steel and aluminum, auto suppliers are pleading for a little mercy to prevent further damage to their bottom lines.

Industry officials say they understand the White House wants to drive more production back to the U.S. as part of its jobs strategy. But they say suppliers need time to develop more affordable domestic sources of metal and can't afford to make those investments if they're getting beat up with tariffs at the same time. So they're pitching the administration on a grace period from the 25 percent tariffs until enough U.S. capacity is built up.

"It's difficult, if not impossible, to fund the cost of those tariffs as well as technology development to localize that production," Ramzi Hermiz, CEO of metal parts maker Shiloh Industries Inc., of Ohio, said last week during a discussion organized by the Motor & Equipment Manufacturers Association. "We need a window of time to ... redefine our supply chain."

Hermiz also called on President Donald Trump to exempt Canada and Mexico from the metal tariffs since they both tentatively agreed to a new free trade agreement. The new U.S.-Mexico-Canada deal wouldn't go into effect for three years after approval to give industry time to adjust. Hermiz said companies should be given a similar transition period to find domestic steel and aluminum supplies.

"Having those tariffs in place without giving consuming manufacturers the opportunity to find the localized production is going against the goal of the administration," said Ann Wilson, MEMA's senior vice president for government affairs.

The metal tariffs, she noted, are just one of the many headwinds roiling the supplier industry, along with tariffs on Chinese imports, retaliatory tariffs from trade partners and the potential for lower returns on sunk investment if the administration succeeds in rolling back fuel economy and emissions standards.

No easy switch

Canada, taking a protectionist page from Trump, last week imposed a 25 percent surtax on seven types of steel imports once they exceed historical average volumes. The action was due to concerns that cheap foreign steel normally bound for the U.S. is being diverted to Canada. Canada already has imposed a 25 percent retaliatory tariff on U.S. steel. It is unclear whether the surtax would apply if the U.S. and Canada resolve their tariff battle.

Many automakers and suppliers procure the vast majority of their steel and aluminum in the U.S., but certain high-end grades needed for specialized applications are available only overseas or in limited supply domestically.

Switching sources involves having material engineers from automakers and parts suppliers work with integrated steel mills to develop new alloys at the equivalent grade of imports. They must then be validated to make sure the products meet technical specifications. All that takes time, industry executives say.

"If we can meet the administration halfway to talk about localization, they need to meet us halfway and say, 'How much time do you need?' " Wilson said. "That's sort of a very different way to talk about it ... so we'll see how successful we can be."

The proof, according to Hermiz, is in the administration's granting of exclusions to the very steel industry that sought protection from foreign competition, on the grounds that the raw materials aren't available.

"If they can't even get all their raw materials to localize their production for steel we're consuming," he said, "what makes somebody think that we as an industry can do it overnight when they produce a more base raw material versus the complex infrastructure we're building?"

Trickling down

Stacy Ettinger, a partner at K&L Gates and a former senior policy adviser to Senate Minority Leader Chuck Schumer, D-N.Y., questioned whether the administration would go along with a tariff pause. "I think they are so far down the road with respect to tariffs and product exclusions," she said.

The impact of tariffs has taken awhile to trickle down to customers and consumers as manufacturers absorbed costs themselves or used up pre-tariff inventories, but the effects are starting to show, according to economists. Ford Motor Co. has said it is taking a $1 billion profit hit because of metals tariffs.

"U.S. steel costs are more than anywhere else in the world," Joe Hinrichs, Ford's president of global operations, said last week at a ceremony marking the start of Ford Ranger pickup production at a factory near Detroit.

In July, General Motors Co. said second-quarter commodity costs were up $300 million from a year earlier.

Prices up

The tariffs have allowed domestic producers to raise steel prices and profits. The price of domestic hot-rolled band — the benchmark for American-made steel — has risen 28 percent in 2018 as the U.S. implemented tariffs on imports. The levies helped push the price as high as about $1,000 per metric ton in June and July, according to SteelBenchmarker.

U.S. steel currently costs $413 more per metric ton than steel in China, the world's biggest consumer, which accounts for more than half of global demand.

Companies can avoid paying the duties by applying for exemptions, but critics say the process is cumbersome and slow. Applications must be submitted for each unique product, no matter how similar.

As of Oct. 22, 42,040 steel and 5,302 aluminum exclusion requests had been filed; 26,380 steel requests were still in the review pipeline (11,284 requests had been approved), as well as 4,397 aluminum decisions (743 requests approved), according to the Department of Commerce.

Over the summer, the agency partly addressed criticism by allowing petitioners an opportunity to respond to any company opposing their exemption request.